After the heady flow of capital and the aggressive growth of the last two years, for founders and investors in Indian technology companies 2016 is a year of calibration and introspection.

With capital flow slowing and job cuts becoming prevalent across startups, the environment for emerging businesses is undergoing a sea change.

To gauge the pulse of startups in this period of churn and the challenges they face, The Economic Times conducted an exhaustive survey of the most influential entrepreneurs and investors in the country.

The first part of the survey’s findings, published last week, focused on the Big Picture—will domestic startups be able to triumph over the US giants; when will investor sentiment improve; and despite the doom-and-gloom, is it still a good time to startup.

In the second installment, ET zooms in on what has changed for founders and investors specifically.

One factor of friction between founders and venture capital investors, mentioned only behind closed doors, is the growing tribe of entrepreneur-investors. The concern is not over the investments but how much time do the founders allocate to their investee companies. And how do they overcome any possible conflict of interest?

The findings reveal how entrepreneurs are adapting to the changing landscape, how they are reducing spending and the salary expectations of employees. To investors, ET asked how have valuation expectations had changed and what sectors are next on their radar.Analysis

​One of the strongest trends to have emerged in the last two years is the rise of entrepreneur-investors. While earlier the main option for entrepreneurs seeking angel funding was groups like Indian Angel Network and Mumbai Angels, now founders such as Snapdeal’s Kunal Bahl and Rohit Bansal and Flipkart’s Sachin Bansal and Binny Bansal have become the first port of call.

Angel investing has become a cool thing to do especially for Indian technology entrepreneurs. Even the founders of a few seed-funded companies are dabbling in such deals. More than half of the entrepreneurs surveyed by ET have made at least one angel investment.

Some founders have built portfolios of dozens of investee-startups and hired professionals to manage their investments. Venture capital firms have started co-investing with entrepreneur-investors in seed deals. But there is a simmering tension.

More than three-quarters of the investors polled believe entrepreneurs should not be angel investors, instead focusing their time and energy on growing their own companies.

Q. How have valuation expectations changed as compared to the first half of 2015?Analysis

Now that investors such as New York’s Tiger Global Management, Japan’s SoftBank Corp and other overseas hedge funds have pulled back in India, venture capital investors are seeing a significant correction in the valuations of their portfolio companies. Many of the investors polled estimate that valuations have dropped by 20-50% across companies.

One investor indicated that valuation expectations for consumer internet companies have fallen by at least 50%, and for software-as-a-service startups by 30%.

Mutual funds have started marking down their shares in companies such as Flipkart, India’s most valuable internet firm, by as much as 40%. Recently, budget hotel-rooms aggregator Oyo raised capital from existing investors without any increase to its valuation.

Q. Will you do more or fewer investments this year?Analysis

It was a busy 2015 for venture capitalists as funding hit a peak, with 473 deals registered and total capital invested doubling to $5.4 billion. But the first half of 2016 has been a sobering experience, as the number of VC deals decreased to 183 and the capital invested dropped to $1 billion.

It is not surprising that investors are split on whether to get their house in order first or make the best of the decreased valuations. Investors have kept themselves busy this year working with portfolio companies, helping them improve their metrics and in several cases also leading internal funding rounds.

Some are also busy figuring which startups will click and which won’t before putting their weight behind them. Several are also reserving their corpora for follow-on funding rounds. Several investors who were sitting on the sidelines last year because of the high valuations have become more active this year. Other investors increasingly getting into the Indian market are strategic and corporate venture capital firms.

Q. What sectors are you keen to invest in, in the next 6-12 months? (Ranked in order of priority)Analysis

Investor favourites keep changing every year. While hyper-local service and delivery startups were must-haves for every investor in 2015, this year it’s financial technology companies. Even as fundraising has become difficult, online lending startups such as Lendingkart and Capital Float have managed to rack up impressive funding rounds.

SaaS and enterprise startups are the next best bets for venture capitalists, with many of them seeking to diversify their portfolios from consumer internet and take advantage of India’s software exports. For all this, online retail and ancillaries startups continue to be in favour.

Q. What is the average age of entrepreneurs to whom you have given term-sheets in the past 6 months?Analysis

In late 2014 and early 2015, entrepreneurs emerging from right out of college were the most fancied.

After all, some of the world’s richest companies such as Microsoft, Facebook and Snapchat were founded by college students. The Indian Institutes of Technology in Delhi and Mumbai became hunting grounds for investors looking to seed fund the next bright idea.

But after spectacular altercations last year between Housing’s founder-CEO Rahul Yadav, who was the poster boy for campus startups, and the board of the SoftBank-backed company, this set of young founders are no longer top draws.

Even as investors have returned focus to backing solid ideas, the founding team continues to be an important factor for them. While a number of investors still scout for young entrepreneurs, there is an increasing preference among others for a bit more grey hair.

Entrepreneurs

Q. What will be the No. 1 priority for your startup in the next 6-12 months?

Analysis

Even with the ongoing funding crunch that’s in part a result of entrepreneurs prioritizing growth over profitability, many founders appear still to be gunning for high growth, selling more units and acquiring more customers.

Several of the respondents said growth and profitability have to go side by side.

Some entrepreneurs believe that while a strategy of improving unit economics and targeting breakeven might work, it is yet to be proven.

What is clear is that cash is still king and a runway for at least 18 months of operations is critical for any startup to ride through this tough environment.

Q. In which areas have you particularly cut costs and reduced cash burn this year? (Ranked in order)Analysis

The funding market is expected to be stagnant for at least the next six quarters. When it comes to slashing costs, an entrepreneur begins with the highest cost line on the profit and loss statement. That would be the budgets allocated for marketing and advertising and for discounting to win over customers and vendors.

Entrepreneurs are also going slow on expanding to new geographies and launching new products and services. With the business environment turning unpredictable, it is also a time for entrepreneurs to revisit long-term plans and take hard calls on shutting units and stopping experiments that are not yielding results quickly enough.

Many entrepreneurs said laying off employees was a last resort. Even so, from unicorns Flipkart, Zomato and Ola to smaller companies TinyOwl, Grabhouse and Helpchat, everyone has let employees go this year to control their cash burn rate.

Q. What is your hiring plan for this yearAnalysis

There was a time in 2015 when entrepreneurs were spending most of their time hiring key talent and trying to double their people count. As investor sentiment dimmed in the third quarter of that year, the trend sharply reversed and startups became more cautious in filling key positions.

A few entrepreneurs who may have recently raised money are still expanding their workforce but with more checks. Some respondents, however, confessed they had to let go of employees to manage their expenses and operations more efficiently. Interestingly, no one’s considering a freeze on hiring

Q. How have salary expectations for talent changed over the last one year?Analysis

In spite of the difficult times for startups, salary expectations have gone up. Indian startups used to increase salaries as frequently as every quarter or at the time of raising funds.

As a result, prospective startup employees, too, have raised their salary expectations.

Also, while employees are now more accepting of stock options, cash is still king.

Methodology

​ET designed two different questionnaires for the survey—one targeting entrepreneurs and the other, investors.

While respondents were given multiple choice answers to pick from, they had the option to elaborate on their choice.

Some questions were common to both—like when would investor sentiment around internet companies likely pick up.

The surveys were distributed to about 120 founders and investors. They were chosen carefully—founders of companies worth at least $100 million, serial entrepreneurs and managing directors of venture capital firms. They were allowed to respond anonymously.

Of the 120 people ET reached out to for the survey, 62 startup entrepreneurs and 27 investors participated.